Euro drops to 6-week lows as expectations of ECB easing grow

Frankfurt (May 15) The euro fell to six-week lows against the dollar on Thursday, as better-than-expected German data were outweighed by expectations the European Central Bank is poised to ease policy at next month's meeting.

The euro hit those lows after ECB Vice President Vitor Constancio said the central bank was determined to act swiftly and does not rule out more monetary easing. Media speculation that the ECB may lower the deposit rate, the rate at which it accepts surplus cash from banks, into negative territory also pushed the euro lower, traders said.

Traders said the focus was on final euro zone inflation data, which is due at 0900 GMT. It is forecast to show a reading of 0.7 percent, unchanged from the first estimate. Any downside surprise could push the euro lower.

German economic growth doubled to 0.8 percent quarter on quarter, beating forecasts, but France missed expectations, showing the euro zone's second-largest economy was flat in the first quarter. Euro zone first-quarter GDP is due at 0900 GMT and is forecast to show the economy expanded 0.4 percent from the previous quarter - its strongest growth in three years.

"Due to the backward-looking nature of the series, it is unlikely to have a material impact on euro," said Chris Turner, head of currency strategy at ING. "Probably more important will be the April inflation print. Any downside surprise would reinforce market expectations of ECB rate cuts next month. Until the next ECB meeting, we expect euro to be primarily driven by comments from various ECB members."

Reuters on Wednesday quoted sources as saying the ECB is preparing a package of policy options for its June meeting. They include cuts in all its interest rates, plus measures aimed at boosting lending to small- and mid-sized firms.

The euro hit a 2 1/2-year high of $1.3995 against the dollar last week, but heightened speculation of ECB easing, in part spurred by bank officials expressing concern over the currency's strength, knocked it to a six-week low of $1.36855 on Thursday.

"Except for quantitative easing, which it likely won't resort to for a while, the ECB does not have a lot of easing options at its disposal to keep the euro down," said Masafumi Yamamoto, market strategist at Praevidentia Strategy in Tokyo.

"Therefore it will have to keep sending a steady message, saying it will ease a step at a time. The various ECB officials will also have to march in unison and convey the same message, especially with the dollar also showing signs of weakness," he said.

The dollar was flat against the yen at 101.95 yen after losing 0.35 percent on Wednesday, tracking a fall in U.S. Treasury yields. It fell to the day's low of 101.66 yen after a report showed Japan's economy grew in the January-March quarter at its fastest pace more than two years, but the decline was short-lived.

"Strong economic indicators tend to be associated with expectations of Bank of Japan foregoing further easing, so there may have been a knee-jerk reaction," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

"But there are firm bids for the dollar in the middle 101-yen range and participants are wary of that too, keeping movements confined in range."